Marketing Communication Your Capital is at Risk

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Integumen plc Integumen Plc “Integumen” is seizing an opportunity presented by skincare and personal product manufacturers that find themselves overwhelmed by excessive data, strict new EU, US and Chinese regulations and the need to improve product claims while responding to consumer-led demands for an end to laboratory-based animal testing. Surging demand for its laboratory and data services has resulted in the Board reiterating guidance that anticipates a four-fold revenue increase for the year just ended being matched by a further, similar improvement in 2020. Significantly also, the incorporation of Rinocloud’s high margin data analytics and AI services offer potential for the Group to be generating positive monthly cash flows by the end of H1’2020E, with anticipated demand from global-scale manufacturers potentially even testing its newly expanded laboratory capacity before the year end.

Integumen has recognised both the unique nature of Labskin’s laboratory services and the urgent need to incorporate automation and data analytics with machine learning and artificial intelligence. Its integrated offering is now capable of providing real-time skincare test results and analytics to an industry that now finds itself overwhelmed by excessive data, strict new EU, US and Chinese regulatory demands and the need to significantly heighten clinical trial efficiencies. The restructured management team, under CEO Gerard Brandon, has responded successfully to the upsurge in demand it is now receiving from the global skincare and personal products manufacturers.

A disruptive, scientifically proven combination of (a) an ethical, animal-free 3D laboratory-grown skin model, that mimics a range of healthy, diseased and damaged human dermis in order to reduce the cost and testing time of skincare product analytics and development and, (b) a one-of-a-kind virtual AI microbiology laboratory comprised of a skin testing database with datasets that provide real-time feedback/analytics for skincare product manufacturers on how to improve the impact and verifiable claims of new and existing consumer products on typical consumer microbiome.

Regulators are also significantly complicating issues for manufacturers and distributors. The 26 May 2020 deadline for compliance with the new EU Medical Device Regulation (‘MDR’) 2017/745, the US EPA declaration of animal free testing by 2023 and the Chinese agency Gansu Province National Medical Products Association announcing that post-market animal testing would no longer be a requirement on finished domestic or imported cosmetic products, are forcing a fundamental change on an ill-prepared industry that is obliged to compile new clinical evidence/data transparency in order to keep both its existing and new product introductions on the market.

Skin diseases are now ranked as the fourth most common cause of human illness9. A recent European Academy of Dermatology and Venereology study, for example, estimated a 64.5% prevalence of skin diseases outside the typical medical setting, thereby recognising the huge potential of this growing OTC and prescriptive market.

Integumen has positioned itself to provide services to a significantly undersupplied top-tier of personal and cosmetic industry giants that are struggling to keep their products on retailer’s shelves. Its market opportunity stretches across the EU and the US, while also expanding into China which now accounts for as much as 20% of total global demand. Having already taken steps to cope with the rush kick-started by the EU’s new legislation, the Group considers its ability to support skincare manufacturers across three continents by ensuring existing and new products remain compliant in a consumer market that is calling out for innovative solutions, ideally positions it to generate long-term high margin returns. Turner Pope’s modelling of Integumen’s opportunity implies a valuation close to twice the current level.

BUY Stock Data Share Price: 1.71p

Target Price 3.23p Market Cap: £18.3m

Shares in issue: 1072.4m Company Profile Sector: Personal Products Ticker: SKIN Exchange: AIM

Activities

Integumen plc (‘the Group’) is an ethical, vertically integrated test services company focused on developing and commercialising a combination of AI technology and laboratory grown skin that scientifically proves the impact of skin care product claims for healthcare, life sciences, clinical research, pharmaceutical and cosmetics industries.

Share price performance

Source: London Stock Exchange

Past performance is not an indication of future performance.

Turner Pope contact details Turner Pope Investments (‘TPI’’) Limited 8 Frederick’s Place London EC2R 8AB

Tel: 0203 657 0050 Email: info@turnerpope.com Web: www.turnerpope.com

Attention is drawn to the disclaimers and risk warnings at the end of this document. This is a non-independent marketing communication. The analyst who has prepared this report is aware that TPI has a relationship with the company covered in this report. Accordingly, it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

TPI acts as broker to Integumen plc.

Retail clients (as defined by the rules of the FCA) must not rely on this document.

Barry Gibb Research analyst Tel: 0203 657 0061

Barry.Gibb@turnerpope.com

Note: Other than Cellulac, all above subsidiaries are 100%-owned by Integumen

Integumen plc – Corporate Profile Source: Integumen

Source: Integumen

Company Information

Company Secretary

Camillus Glover 12 James’s Terrace, Malahide, K36N996, Ireland

Registered Office

Sand Hutton Applied Innovation Campus, Sand Hutton, York North Yorkshire, YO41 1LZ

Company Website www.integumen.com

Nominated Adviser Spark Advisory Partners Limited 5 St. John’s Lane London, EC1M 4BH

Joint Broker Turner Pope Investments (‘TPI’) Ltd 8 Frederick’s Place London EC2R 8AB

Auditors Jeffreys Henry LLP Finsgate, 5 – 7 Cranwood Street London, EC1V 9EE

Registrar Neville Registrars Steelpark Rd Halesowen B62 8HD

Market: AIM Admission Date: 5th April 2017 Sector: Personal Products TIDM: SKIN.L Share Price: 1.71p TPI Target Share Price: 3.23p (as of 8th Jan 2020) 12M High/Low: 2.58p – 0.48p Market Cap: £18.3m Existing Shares: 1,072.4m ISIN: GB00BYWJ6269 SEDOL: BYWJ626

EIS / VCT Qualifying N/A

Integumen– Recent Corporate Activity 9 December 2019 Equity capital raise: Placing/Subscription to raise £1.368m at 1.5p/share

12 April 2019 Equity capital raise: Placing to raise £2.518m at 1.4p/share, acquisition of RinoCloud Limited, £0.84m debt conversion from Venn Life Sciences plc and Cellulac plc

18 March 2019 Turner Pope Investments (TPI) Limited reappointed as Broker 18 December 2018 Divestment of TSPro GmbH to remove c.€1.34m (£1.19m) of short- and long-term liabilities 22 November 2018 Equity capital raise: Conditional Subscription and Placing to raise £355,000 at 0.44p/share 16 July 2018 Equity capital raise: Placing/Subscription to raise £229,500 at 0.65p/share, Cellulac plc Heads of Terms

Company Overview Integumen is a vertically integrated test services company focused on developing and commercialising technology and products that scientifically prove the impact of skincare product claims for healthcare, life sciences, clinical research, pharmaceutical and cosmetics industries. These allow clients to test their products on human-like skin in a real-world environment with full access to multiple state-of-the-art partner technologies.

Rinodrive (100%-owned subsidiary) is a data aggregation, refining and AI analysis open-source eco-system designed to provide third-party service providers the ability to offer clients valuable insights to support clinical, operational and financial decisions in healthcare services, third-level education, government departments and the financial sector.

Wound pHase is a skin and wound care product development wound dressing technology. Stoer-For-Men skin products e-commerce division offers a range of skincare

Source: Integumen

Position Board of Directors Non-Executive Chairman Ross Andrews Chief Executive Officer Gerard Brandon CFO & Operations Director Camillus Glover Group Sales Director Fionan (Fin) Murray

1 Year Share Price Performance

Past performance is not a reliable indicator of future results Source: London Stock Exchange

Innovenn UK Ltd (Labskin)

Major Shareholders Holdings Fionan (Fin) Murray 8.19% Gerard Brandon 4.68% Camillus Glover 3.96% Ross Andrews 0.21% Helium Rising Stars Fund 7.37% Cellulac plc 3.56%

Rinocloud Ltd (LabskinAI)

STOER Ireland Ltd

Integumen Ireland Ltd

Life Science Hub UK Ltd

(LabskinAI)

Life Science Hub Ire Ltd

(LabskinAI)

Cellulac Plc (9.35% Investment Only)

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Integumen plc – Background and Recent Performance Integumen is a vertically integrated business, collaborating technology platforms with partners in artificial intelligence, clinical research, medical device and life science. Its collaborators are building their own technology anchored on the Labskin AI backbone. Labskin’s technology allows skincare, healthcare, pharmaceutical manufacturers and cosmetic companies to test their products on laboratory-grown, human-like skin in a real-world environment with full access to multiple partner technologies covering data manipulation and analytics.

Integumen plc – Product Offering

Source: Integumen website

Following its April 2017 Admission onto London’s AIM, Integumen’s operational and market focus sharpened in summer 2018, with the appointment of two highly experienced and entrepreneurial executives, namely, Gerard Brandon and Camillus Glover, as the Group’s new Chief Executive Officer and Chief Operations Officer. In conjunction with this Board reshuffle, a placing/subscription (raising £719,500 at an issue price of 0.65p/share) was announced along with non-binding Heads of Terms to acquire 9.35% capital of Cellulac plc, a company founded by the same two individuals and in which they continue to hold similar executive roles. Just one of Integumen’s previous Board members, non-executive Ross Andrews, now remains albeit subsequently going on to assume the role of the Group’s Non-Executive Chairman (May 2019), with one other external appointment, that of Fionán Murray as Group Sales Director, following also in May 2019.

In April 2019 the new Board undertook a series of transactions, including the acquisition of enterprise software systems company, Rinocloud Limited. This company, which was founded by the aforementioned Fionán Murray (an entrepreneurial individual whose team members in past years took responsibility for building the Australian Medical Association’s infrastructure), which the Group acquired in Q2’2019 through an all-shares transaction to the value of £3m. This was following a collaboration since that began in September 2018 for the digital automation of Labskin’s laboratory process and through early evolution provided a strategically important end-to-end science-data management service designed to enable Integumen to efficiently scale up its Labskin AI offering, something recognised as key to securing the Group’s expanding market opportunity. At the same time the Board confirmed its successful elimination of short, medium and long-term debts in excess of £2m, while also raising £2.52m (before expenses) through a further equity placing and subscription in order to fund laboratory expansion along with additional working capital, which occurred in tandem with receipt of a further £373k from exercise of existing warrants.

The disposal of hitherto underperforming subsidiaries began with TSPro GmbH in December 2018 and concluded with the Visible Youth Group in May 2019, the latter being part of an ongoing legal settlement with Mr. Donald Nicholson on behalf of Mercuriali, Enhance and various creditors of the business at that time; the accounting effect of this was to record a book loss on disposal of c.£430,000, ostensibly representing intangible assets which had a value of £441,000, in the Group management accounts to 31 December 2018.

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Significantly, with release of its interim report in September 2019, management noted that Integumen’s pipeline activity had continued to expand and that it was experiencing activity levels higher than in the past with good demand and visibility for its broadened range of products and services. It also noted that the Rinocloud transaction had rapidly proved its worth, having moved into profitability before the end of H1’2019. In October management went further, noting that significant potential contract extensions along with a healthy pipeline was expected to be serviced through expanded laboratory space due to come on stream shortly at their York premises. Despite having just two months of this additional capacity, management noted their confidence that Group revenue would be able to exceed £1m by the year end, roughly four-times that seen in the comparable period.

Half year results released on 11th September 2019 detailed revenues from continuing operations increasing by 540% to £346,697 (H1 2018: £54,149) and an EBITDA loss that reduced by 32% to £370,102 (H1 2018: £544,278). Performance highlights included LabskinAI (through Rinocloud acquisition) becoming profitable by period end and the signing of four ‘blue-chip’ (US and EU) client agreements for test services on household name soap and cosmetic brands. The recent fund raise of 9th December 2019 is expected to provide capacity and facility to service the accelerated pace of organic growth anticipated over the next two years, an ambitious medium-term expansion plan already sees it placing laboratory and local data technology facilities in key US and Asia locations. The Board considers this phase is likely to be accelerated through a ‘buy-and-build’ strategy commencing as early as 2022E.

The Group’s 3,162 square foot Labskin laboratories officially opened in November, accompanied by the announcement that the subsidiary had signed agreements with two new, and one existing, Top 20 global cosmetic company clients for microbiome research and development services. These were said to be worth an aggregated ‘low six-figure value’ and due to be completed over the following next four months, with additional service agreements from all three clients expected to follow on after these initial trials are completed. In a further news release that month, which detailed a revenue sharing agreement to deliver AI data solutions across the UK NHS clients of Parity plc (the AIM-quoted professional recruitment and leading-edge IT solutions company), Integumen provided a trading update noting it had seen average 2018 client sales grow from £5k to £50k in the year to end-December 2019, as it successfully moved one-off sales to service contracts.

It went on to suggest that Integumen was engaging with ‘multiple top 20’ global skin and personal care companies and believed average sales were prospectively seen moving into a range of between £100k and £500k for ‘data as a service’ across its skincare R&D framework multi-year agreements. Providing good visibility of revenue, management then also formally guided investors to anticipate 2020 full year revenues of £4m. Reiterating this expectation, the Group announced a further placing and subscription of new ordinary shares in December, through which it raised c.£1.368 million (before expenses), utilising all of the headroom available, in order to ensure the Group had facility sufficient to cope with its continuing phase of rapid growth. A further RNS just released has again repeated management’s confidence in existing guidance for both 2019E and 2020E.

Although Integumen’s near term growth will be driven by Labskin laboratory-based testing and related data analytics through Rinocloud, the Group’s wider product offering and opportunity to capture additional user-bases and revenue streams outside of the Group’s presently core skincare and personal products services also holds significant medium-term potential. The aforementioned 3-year revenue sharing Framework Agreement with Parity Group plc, (AIM:PTY), for example, highlights exactly this point and the exceptional value the acquisition has created. It opens opportunity for Rinocloud to supply and roll-out its high-margin mobile enterprise resource, data management and business tool software services to 150+ new clients, ranging from the National Health Service (‘NHS’), Public Sector, Utilities, Housing Associations to Private Institutional companies. Prudently, Turner Pope has not included upside from this agreement in its current valuation model projections.

Looking elsewhere across the Group’s wider offering, Integumen’s STOER For Men range of skin products and its Wound pHase’s treatments for chronic conditions, now both being tested to include cannabinoid-infused derivatives. Its range of micro biomaterials (smart materials for studying, directing and mimicking biology), also

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continue to be developed. The Group’s existing international sales, marketing and distribution channels are their obvious route to market although, alternatively, management may consider offering of these unique products to private label brands on a licensed basis. Recognising the need to rapidly secure its market opportunity, Integumen has recently closed a placing and subscription led by its broker Turner Pope, in which it raised gross proceeds of £1.368 million (c.£1.245 million net) through the aggregate issuance of 91.25 million new shares at a price of 1.5p/share.

Funds raised will seek to further enlarge laboratory space, purchase new equipment and hire scientific, data analytical and business development staff, while also providing working capital to improve Labskin operational capacity, response time and increase Rinocloud data resource and management services.

Artificial Intelligence (‘AI’) – Core to Integumen’s Development AI is now central to Integumen’s business plan. Its application in combination with the Group’s automated, digitised and data-heavy laboratory-based services, provides for a disruptive solution that is expected to become core to delivering a step-change in speed, efficiency, accuracy and optimization in personal care product development and regulatory compliance. Rinocloud Limited originally introduced the concept of AI and data analytics to Integumen’s current senior management team back in 2018, which moved rapidly to fully integrate its operations and key staff in 2019.

AI makes it possible for machines to learn from experience, adjust to new inputs and perform human-like tasks. Most examples rely heavily on deep learning and natural language processing. Using these technologies, computers can be trained to accomplish specific tasks by processing very large amounts of data, within which they can recognise patterns, irregularities, trends or omissions, thereby dramatically speeding analysis while also eliminating costly, error-prone manual processing. Being an IT and software-based business model, innovation, early-mover advantage and brand recognition are the key elements to success, through which exceptional gross margins and long-term customer loyalty might be anticipated.

Applying AI to the personal products and healthcare

Integumen’s core operational area in personal product, healthcare and medical research finds itself overwhelmed by large, ever expanding and complex data sets. The stream of data available to such companies has now grown to a tidal wave; the total volume of health data in the world, for example, is expected to soar to 2,314 exabytes by 2020, 15 times what it was in 201311, 12.

The increasing rise in both regulatory demands and areas such as personalised medicine means that the problem is only going to get worse. The industry is, however, recognising that the only way to adequately manipulate and analyse such a saturation is to adopt new technology.

It also understands that AI will become transformative in areas such as clinical trials and drug discovery/application, by ensuring regulatory quality data, sorting and classifying entry errors, outliers, inconsistencies and misreported adverse events, etc. which will dramatically speed and reduce costs across the various process of approval. Its significance has not been lost to various global forecasting bodies, such as the McKinsey Global Institute, which estimates that AI could add US$100 billion in value to the life sciences industry annually13. Similar analysis by Accenture14 predicts as much as US$150bn potential annual benefits by application by 2026E, as follows:

11https://www.pm360online.com/the-impact-of-artificial-intelligence-on-data-analytics/ Andrew Matthius, November 19th 2018 12https://www.cio.com/article/2860072/healthcare/how-cios-can-prepare-for-healthcare-data-tsunami.html Kenneth Corbin, 16th December 2014 13 https://www.mckinsey.com/industries/pharmaceuticals-and-medical-products/our-insights/how-big-data-can-revolutionize-pharmaceutical-r-and-d Jamie Cattell, Sastry Chilukuri and Michael Levy, April 2013 14 https://www.accenture.com/_acnmedia/PDF-49/Accenture-Health-Artificial-Intelligence.pdf#zoom=50

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Accenture Healthcare Market Analysis : Potential 2026 AI Annual Benefit

Past performance or forecasts are not a reliable indicator of future performance. Source: Integumen

Accelerating Lab-to-Market time, at a fraction of the cost

A recent Labskin video highlights the Group’s vision for full integration of AI into its core laboratory operations. It envisages a transition from the currently outdated pharmaceutical drug development model, which typically sees Big Pharma taking as much as 10 years to move from concept to commercialisation with an average €2.6 billion investment in order to introduce a single new therapy to market15 based on just a 10% chance of success having entered clinical trials. The lowly 3.7%15 industry ROI being achieved (2016), highlights the need for urgent and significant change, something that new technologies can now deliver and international regulators (like the FDA, EMA etc.) will welcome.

More specifically for Integumen, big data analytics are seen as key to transforming the future of skin disease drug development, an area that despite being the fourth most common human illness has seen relatively little development spend over the past three decades. Not typically presented as a life-threatening condition, drug development groups have generally considered that the absence of blockbuster returns, despite having to undertake extended, costly clinical trials that still come with high prospective failure rates, has not warranted the risk. A solution nevertheless is desperately sought by millions of suffers, hoping for the introduction of new therapies, improvement to existing products and/or application transformations to deliver superior skin healing capabilities. In this respect, early implementation of AI offers potential to identify biomarkers that cause diseases. It is also makes possible the recruitment of eligible clinical trial participants and sift through millions of words of text, molecules, genomic sequences, images etc. in minutes. It is anticipated that the time required to bring a new drug or cosmetic product to market can be reduced and significant funding avoided; in the case of product reformulations and combination of existing treatments, for example, the time to commercialisation might possibly be reduced from years down to just months.

China - A major future market opportunity

Although the United States is the current consumer leader globally, with the EU close behind, the Asia Pacific skin market opportunity, specifically in terms of microbiome (bacteria, fungi and viruses that live on the human dermis), is expanding so rapidly that analysts expect China to develop into the largest global market by 202516. With China also expected to gradually join the international movement against animal testing, Labskin’s ethical human skin equivalent that mimics this microflora (bacteria, virus and fungi) is ideally placed for brand and licencing opportunities in the country.

15https://www.labskin.co.uk/how-ai-is-revolutionising-healthcare-and-skin-disease/ 16https://www.labskin.co.uk/china-on-verge-of-skin-microbiome-explosion/

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EU Medical Devices Regulation3 (‘MDR’) 2017/745 Vendors, suppliers, manufactures and licence holders of medical devices across the EU are being forced to comply with significant new regulation in order to continue offering their consumer, personal and household products.

26 May 2020 is the deadline for existing Class 15 compliance with the new EU Medical Device Regulation (‘MDR’) 2017/745, after which they can no longer be placed on the market. Up to now such devices have been simply ‘CE marked4’, with a self-certification by the Manufacturer who had only had to declare their compliance with the requirements of the previous Directive 93/42/CEE. This covered almost half of available consumer products with the FDA, for example, indicating 47%1 of total medical devices had historically fallen under this category, of which then 95%1 were treated as exempt from the regulatory process.

An impetus for change

The impetus for change was found in technological advances together with recent scandals that have demonstrated some of the shortcomings of current medical device regulation. Widely publicised product failures in relation to ‘PIP’ breast implants and DePuy metal hip replacements, in the opinion of the European Commission, highlighted “the weaknesses of today’s legislation”. In this respect, existing regulation, which was established in the 1990s, is now considered inadequate in its protection of the consumer. A wider set of products will also be captured by the updated legislation due to a broader definition of medical devices/in-vitro diagnostic medical devices. For example, software is expressly included as a ‘medical device’, and the new definition includes not only traditional devices but also products previously considered accessories to those devices (i.e. cleaning and disinfecting products) and, similarly, extend to products without a specific intended medical purpose.

The Commission has designed the new regulations to improve the quality, safety and reliability of medical devices, while also strengthening the transparency of information for consumers, and enhancing vigilance and market surveillance. Now all of the actors in the supply chain will for the first time, have potential responsibility for defects in devices – previously the regulations focused solely on manufacturers. In addition, manufacturers outside the EU will need EU-based authorised representatives. This means that there will be businesses, previously unregulated, which will face a significant challenge in getting up to speed with regulatory requirements. Additionally, many existing medical device businesses will need to review their product portfolios to establish whether new products have been brought into the regulated environment. A new Medical Device Coordination Group has been charged with, amongst other things, the introduction of common specifications for medical devices, and supporting overall implementation.

Risk Classes

Applying the new classification rules, the risk class of certain kinds of medical devices will increase, with some previously Class 1 products even requiring demonstration of conformity assessment to the Notified Body when used for measuring, reusable or provided sterile. A 3-year transitionary period followed the legislation’s formal approval on 5 April 2017, which replaced two existing directives – the Medical Devices Directive and the Active Implantable Medical Devices Directive. In due course, each device will need to have a unique device identifier (‘UDI’). This UDI will then be logged on the European database for medical devices (‘EUDAMED’), and the records will be updated to give a living picture of devices as they move through the supply chain. This is likely to assist both with the detection of counterfeit devices and in the event of product recalls being required. Regulatory authorities will also have more rights to conduct regular reviews, including unannounced visits, with the expectation that each manufacturer will be audited at least once every five years. In addition, manufacturers outside the EU will need EU-based authorised representatives.

The adoption of the new regulation across the EU is required to bring these existing 20-year-old directives up to date with current and future advances in technology. As such, interpretation of the directives becomes more

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transparent and legally binding across all the member states and will no longer be left open to various legal interpretations. This is designed to ensure a consistently high level of health and safety protection for the end user along with free and fair trade within the EU. In the process, however, it also opens up a significant new market opportunity for the few players, like Integumen, capable of offering both laboratory and virtual product testing/analysis, in combination with an AI-based platform that can process and re-present such ‘big data’, to ensure rapid compliance.

The fact that many global-scale producers have approached the Group seeking quotes for such work over the past year, reflects both the uniqueness of its offering and quality/grade of its services. Significantly, Rule 21 will affect manufacturers of various OTC products, cosmetics and household goods that contain active substances which come into contact with, are used on or are absorbed through the skin or other body orifices. Many of these products come with a medical claim (i.e. Antiseptic, Hypoallergenic, Anti-ageing, etc). These products now face being reclassified at a higher medical device level based on those ingredients, and consequently now require stricter clinical testing and proof of efficacy.

Industry-wide, the cost of implementing the EU’s new MDR and IVDR (in vitro diagnostic medical devices) requirements is estimated at nearly US$20 billion, according to EPICOS2, the leading Global B2B information platform. Indeed, a significant portion of that cost is due to new content, data and continuing analysis, all areas in which Integumen provides services. TransPerfect’s MDS President Marc Miller, for example, noted “Two critical areas affected by MDR and IVDR are labelling, including translations, and post-market surveillance. The new regulations will create a substantial, permanent increase in the volume and velocity of content in both of these areas. The only practical way to address this increase is through automation and AI.”

For manufacturers of substance-based devices, meeting these new requirements comes on top of the efforts needed to provide stronger clinical evidence to support the safety and performance of their devices. Additional resources are required and significant investments in pre-clinical testing and clinical investigations, to keep these products on the market under the new legislation. While compliance by ‘/vendors etc. will involve substantial effort and new submissions, it also presents them with an important business opportunity, both for the product originators and the service providers (like Integumen) assisting them with regulatory compliance. The key changes implicit to the regulation are as follows:

Key Changes: MDR 2017/745

Source: Sopra Steria 1https://www.fda.gov/medical-devices/consumers-medical-devices/learn-if-medical-device-has-been-cleared-fda-marketing 2https://www.medicaldesignandoutsourcing.com/u-s-asks-e-u-to-delay-mdr-ivdr-by-3-years/ 3https://www.gov.uk/guidance/medical-devices-eu-regulations-for-mdr-and-ivdr 4https://www.gov.uk/guidance/medical-devices-conformity-assessment-and-the-ce-mark 5https://www.gov.uk/government/collections/guidance-on-class-1-medical-devices

1. Companies will be required to provide additional clinical evidence to both keep such existing products on the market and for new introductions

2. All products will require re-labelling through the regulatory authorities with uniquedevice Identification system (UDI System)

3. Greater data transparency will be required – data derived from clinical and/or laboratory-based trials, etc. will need to be made publicly available

4. Greater requirements for post-market surveillance and performance assessmentestablished for most devices

5. Tighter vigilance timelines required, with reporting being reduced from 30 days to 15 days

6. Classification of products may change, which may now require additional reporting/ surveillance to previous classification

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Inevitably the process will generate much richer datasets around the various products, which will enable them to make more informed decisions regarding future product development direction/requirements, while also potentially broadening their prospective ‘customer net’. Greater requirements for post-market surveillance, for example, will force companies to track usage, identify problems and take remedial action to improve the devices patients depend on. In another potential change, the need to provide additional reporting as part of product classification may lead to the decision to withdraw a product from the market. This offers the opportunity to rationalise portfolios and better direct value of different product lines, while rationalising elements that are less viable or superseded. The final outcome also being competitive advantage through reduced exposure to litigation and reputational damage.

Source: https://incompliancemag.com/article/the-eus-medical-device-regulation-eu-2017745-are-you-ready-for-huge-sweeping-changes/

A need to outsource regulatory compliance8 Consumer product manufacturers lack the experience and technology required to rapidly gather, assimilate and process the data to both adhere to regulatory demands and optimise their offering. Sopra Steria, the giant European information technology consultancy, for example, concludes that most companies base their business decisions on just 10-20% of available data, with up to 80% of employees’ time spent simply locating the information in the first place.

Combining artificial intelligence, clinical research and life sciences, Integumen’s Labskin AI compiles data from both human volunteers and its own laboratory-based full thickness skin equivalent. Its smart systems technology enables the customer to aggregate, ingest and analyse data based on specific health and beauty requirements. The time savings alone make a compelling business case, with customers typically achieving in excess of a 90% (again according to Sopra Steria) reduction in time spent manually processing, while delivering greater accuracy, statistical reliability and depth.

Labskin’s AI tools facilitate evidence-gathering in order to recognise patterns and irregularities across siloed product data (clinical, PMS, regulatory, risk management, sales, marketing, R&D). Machine learning can extract from such ‘Big Data’ to identify patterns and common features, while visualising product performance information in a single place can become much smarter with the use of structured and unstructured data to identify value propositions, clinical insights and product safety. As such, regulatory compliance becomes a win-win situation, providing healthcare providers and consumers with confidence in the efficacy of the medical devices they procure, while deeper product insight also allows them to differentiate and protect their brand reputation.

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Labskin Skin disease is ranked as the fourth most common cause of human illness9. In 2013, the EU Cosmetics Directive prohibited the testing of cosmetic products and their ingredients on animal models. Additionally, the sale of any cosmetic product and/or its ingredients that had been tested on animal models was prohibited within the EU (European Commission, 2014).

This regulation resulted in the need for alternative testing methods within the cosmetic and CRO industries. Labskin, the trading name of Innovenn UK Ltd., itself a wholly owned subsidiary of Integumen, delivers exactly this, in the form of an animal-free human skin microbiology services to support product R&D activities in the cosmetic, personal care, medical device and pharmaceutical sectors. Its model is based on a 3D human skin equivalent that incorporates vital biological components to model normal skin function.

Developed over 12 years with more than 30 scientific journal publications, it is made from young keratinocytes (human skin cells) and adult fibroblasts (metabolically active, collagen-producing human skin cells). As such, Labskin is the only commercially available lab-grown full thickness human skin model that naturally mimics human skin microbiome, given its ability to be colonised either using commensal skin microflora or known pathogenic strains, thereby providing highly reproducible test results in an in-vitro environment.

Labskin has already provided services to 58 skincare client companies; five of the top 10 global personal care companies are existing customers with two multi-year framework agreements already in place and others pending. It has produced enough (Labskin) artificial human skin for 38,000 experiments, while providing support to more than 400 research institutes. Data analysis and automation processes to compare datasets from multiple skin related treatments, therapies, drugs, nutritional pre and pro-biotic supplement databases against skin disease databases are capable of providing instantaneous test results through a virtual online laboratory.

Labskin’s business model has altered to the point where sales of single plates of laboratory grown skin (originally sold in elementary kit form direct to customers), have now been transformed into a combination of laboratory and data-tech services capable of satisfying urgent and growing demand from existing and new clients in the skin care, health care, wound care and pharmaceutical sectors. Contract order price ranges have increased from £1,500-£12,000 in H1’2018 to £35,000-£210,000 in H1’2019. The average is seen moving to in excess of £100,000 in the current year with opportunity as large as £0.5m annually from some of the industry giants in due course. Surging demand for services has resulted in the need to increase laboratory space to accommodate growth. The Group’s York laboratory capacity in the UK was increased by 40% in H1’2019 and was followed by further 50% in Q3’2019 through a £400,000 investment in hi-tech laboratory equipment. December 2019’s follow-up £1.368m (gross) raise was focused on achieving a further doubling of allocated floorspace (currently 3,162 square feet), which, supported by the necessary laboratory equipment, sales and data scientists, management consider could potentially provide as much as a 10-fold increase on 2019 throughput.

As well as planning a doubling of this floor space along with the hiring of six more scientists, Integumen also opened a new facility in Cork back in June; here the current eight staff are expected to at least double in the next 12 months. Based on current projections, this should be sufficient to satisfy needs out to end-2021, although the Group’s medium-term planning already anticipates the setting up of new laboratories on both the east and west coasts of the US while in the Far East, the Board is presently considering opening a facility in either China, Taiwan or Singapore.

Labskin Cloning

In H2’2019 Labskin presented results of a major skin cloning breakthrough at the San Diego Microbiome Movement Dermatology conference. Its scientists cloned 16 swabs of skin from the cheeks of healthy volunteers into 54

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Labskin test subjects to allow sequencing of microbial DNA for the identification and quantification of the microbiome isolated and pooled together. The live bacteria, virus and fungi (microbiota) was consistent on all 54 test subjects for up to 7 days in the Labskin York laboratories.

Further to this, the LabskinAI virtual model aggregated and analysed the bacterial microbiome data, extracted from each sample, and after eliminating false or anomalous readings, provided test results within a range of ±10% of the human volunteers’ control skin from which it was initially cloned.

As a result, it is now possible to test multiple clinical trial and skincare products in parallel, on the cloned human skin microbiome, that is as close to the original microbiome of a human test subject without the need for human volunteers after initial cloning takes place. This allows multiple skincare products or topical drug formulations to be tested on the same subject, at the same time, thereby substantially reducing development time, clinical error and clinical trial supervision costs.

The success of the Labskin subsidiary has recently been demonstrated with the announcement of the signing of (two new, and one existing) contracts with Top 20 global cosmetic company clients for microbiome research and development (‘R&D’) services. These are said to be worth an aggregated low six-figure GBP value and are expected to be completed by end-March 2020.

Additional R&D service agreements from all three are expected to follow after these initial trials have been completed. The company will provide the first commercially available combination of cloned Labskin, microbiome tests and gene sequencing using data analytics on the LabskinAI platform. These are expected to confirm the impact of the clients' new products and ingredients on human skin. This extends the range of test services to now also include R&D support services, making full use of the Labskin healthy and diseased living skin models, at the Group’s enlarged laboratories in York, UK.

Labskin working with AI to Enhance Performance and Returns

Source: Integumen Investor Roadshow presentation, 25th November 2019

8Regulation (EU) 2017/745 of the European Parliament and of the Council of 5 April 2017 on medical devices, amending Directive 2001/83/EC, Regulation (EC) No 178/2002 and Regulation (EC) No 1223/2009 and repealing Council Directives 90/385/EEC and 93/42/EEC (Text with EEA relevance) (html) 9 Journal of the European Academy of Dermatology and Venereology

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Labskin – Application Highlights

Source: Labskin Application Highlights

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LabskinAI

Big data analytics and Artificial Intelligence are key to transforming the future of drug development.

With a modern automated laboratory facility supported by bespoke algorithms, the transformational Labskin AI service provides real-time test results, data manipulation and analysis for skincare, wound care, pharma, healthcare and personal care companies. It facilitates and enables the saving of time, reduces product development lifecycles and offers the opportunity to reduce costs in overall product development. As such, laboratory digitisation and AI implementation is now leading a disruptive charge in the otherwise traditional, slow and highly labor-intensive development, testing and treatment phases employed by healthcare, nutraceuticals and cosmetics industries.

Comparison of Traditional Clinical Trials and the use of Labskin AI

Source: Integumen Investor Roadshow presentation, 25th November 2019

The digital automation of Labskin itself, played a significant role in the turnaround of Integumen; initially this was in a collaboration project on a revenue share model with Rinocloud Limited in November 2018. By January 2019 it had become obvious that advances made in such a short period, were likely to become central to the Group’s future growth objectives. The resulting acquisition was concluded in May 2019, whereupon Integumen and Rinocloud continued to integrate and incorporate the Artificial Intelligent platform into the automation of Labskin to create LabskinAI.

By the end of June, a mere six weeks after the acquisition, LabskinAI, which had just come out of Beta testing, was producing 80% gross margins and was operationally profitable, contributing to the reduction of overhead of the enlarged Group at the end of the period. As such, LabskinAI is now considered central to the Group’s move into clinical trial and medical device sectors, having participated in various tenders for multiple low to middle digit, seven-figure contracts, either as lead or collaboration partner, with expectation of formal contracts in the coming weeks.

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Rinocloud Limited - Acquisition Integumen’s all-share £3m acquisition of RinoCloud (‘the Company’) was announced on 12th April 2019, for which Consideration Shares comprised 22.48% of the Group’s Enlarged Issued Capital. A vendor placing, on behalf of two Chinese shareholders who were not locked-in as part of this transaction and held 7.7% of Rinocloud, was undertaken concurrently along with a placing and subscription of new shares (with 1 for 2 warrants exercisable at 2.0p per new Ordinary Share until 2 May 2021 attached) priced at 1.4p/share to raise in aggregate £2.158m (gross). The net proceeds of the placing and subscription were to be directed toward sales and marketing of Labskin/LabskinAI/Rinocloud, along with settlement of historic liabilities, legacy professional fees and general working capital.

Rinocloud's net asset value at 31 December 2018 was €584,580 in its unaudited, filed accounts for the financial year ended 31 December 2018. It posted turnover of €26,911 and profit before tax of €5,123 for this period.

Rinocloud Background

RinoCloud Limited, founded in Cambridge, UK, in 2016, is an integrated intelligent data service company focused on improving management of science data projects and provides technology services to curate data from generation, through to presentation to support papers, patents and prototypes. It offers a fully integrated set of software tools that can ingest data, in any volume, from any source in any format, interact with it, learn from it and enrich it to unlock insights and discoveries. This data management solution was developed by scientists and engineers with experience in software, sensors, AI, optofluidic research, fintech, green-tech, travel and healthcare. It was designed to allow interaction, in a cyber-secure environment, with commercially sensitive data, and to share insights across multi-disciplinary teams, generating different data formats, from multiple sources, located in different countries. The integrated data management service provided by the Company evolved to incorporate two main activities:

1. RinoLab: Science specific, hardware sensor monitoring, data ingestion, secure data store sharing andcollaboration, and data analytics that support scientific research and development; and

2. RinoDrive: Delivers big data, AI functionality and world class infrastructure to large companies. These includefinancial services, education and life science companies. Most recently completing the automation oflaboratories and application of AI to unearth knowledge related to the skin microbiome. This led to theexploitation of data from some of the largest cosmetic, pharmaceutical and medical companies in the world.General enterprise data management - involving data storage, sharing, and collaboration for situations wheredata security is a critical requirement. Has sold enterprise wide software through partners. This was part ofpartner program that has been used with IBM, SAP, Deloitte, Siemens where account managers were tooled upto recognise software opportunities

Rinocloud undertook a seed financing round in December 2016 and April 2017 raising approximately €600,000 on a pre-new money valuation of €2.35 million, introducing Enterprise Ireland and other international investors as shareholders.

Following the acquisition, Fionán Murray, the Managing Director of Rinocloud, was proposed to become the Group Sales Director of Integumen; post transaction, Fionán Murray became the Group’s largest single shareholder holding 9.1% of the enlarged capital. Persons who previously held, in aggregate, 92.3%. of Rinocloud’s share capital and, post transaction, held a total of 20.75% of the enlarged Group agreed a 12-month lock-in, followed by adherence to a further 12-month orderly marketing agreement.

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Rinocloud – Integrating artificial intelligence into Integumen’s offering

Modern automated support from artificial intelligence technologies, has transformed the laboratory grown human skin equivalent (Labskin) test platform, into Labskin I. This is a service that provides real-time test results to skincare, wound care, pharma, health care and personal care companies. It facilitates and enables the saving of time, reduces product development lifecycles and offers the opportunity to reduce costs in overall product development.

During August to December 2018, the new Integumen management team identified an opportunity in its Labskin business unit to convert what was then a £2,000 (or less) Labskin 'product' into a potential £25,000 to £50,000 'service offering' comprising customers with an integrated package of test and data analytics. An initially manual process was then progressively automated in a drive for increase efficiency, productivity and rapid turnaround, while facilitating opportunity to offer even more services and increase the Company's sales footprint.Integumen management set an objective to find an end-to-end technology solution, such that: (1) it would allow the Labskin team to set up tests and monitor, extract, manage and analyse data more efficiently; (2) it would allow clients to interact, order, provide feedback and collaborate securely with the Labskin team; and (3) it would be scalable allowing the creation of more services to more clients.

In early November 2018, management became aware of the work of Rinocloud and its vision of an end-to-end service where science data was managed - from the benchtop, to extracting value from team collaboration and smart analytics, through to delivering it as verified results to support research. In practical terms, as it applied to the Labskin transformation, Rinocloud could monitor tests, store data from the tests, extract value from that data by allowing collaboration between Labskin and client teams, and by using machine learning to analyse patterns and anomalies, and to deliver the service in a secure infrastructure, including:

• Live automated monitoring of Labskin growth using benchtop and mobile probes with real time dataflowing to analytics

• Software as a service (SaaS) provided over a secure private cloud infrastructure• Historical data from Labskin manual tests feeding analytics• Published data feeding into the artificial intelligence (‘AI’) model• Data ingestion from specialist equipment to further teach the AI model• An integrated front end for client teams to order, monitor and give and get feedback on tests• A work management system to automate the workflows of work relating to tests• A secure store, share and collaborate platform which curates all data from tests and gives clients verified

and verifiable data to support test resultsSource: Integumen RNS release https://www.investegate.co.uk/integumen-plc/rns/acquisition-of-rinocloud--placing-to-raise--2-518m/2019041207000

Over the past three years, Rinocloud has developed a range of software services dedicated to data management - security, storage, curation and analysis - that has generated interest from large blue-chip clients in Government, Financial Services, Healthcare and Scientific Research. Beta software deployments throughout 2017 have provided:

• Secure data collaboration between large financial services groups• GDPR data management compliance for government• Secure data curation and collaboration for research and development groups• Big science data analysis using AISource: Integumen RNS release https://www.investegate.co.uk/integumen-plc/rns/acquisition-of-rinocloud--placing-to-raise--2-518m/2019041207000

Rinocloud sites have grown into valuable reference databanks that generated €207,000 (£178,000) in revenue during the first quarter of 2019, with a pipeline that pointed toward stronger consecutive subsequent quarters. The Directors believe that existing client partnership discussions may result in the Rinocloud range of services being extended to their large existing franchises, both locally and internationally, which should further expand the Rinocloud footprint.

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Framework Agreement with Parity Group plc (AIM:PTY)

As recently as 19th December, Integumen confirmed its signing of a potentially transformational 3-year revenue sharing Framework Agreement with Parity Group plc. This followed a Heads of Terms announced earlier in the month for the supply of Artificial Intelligent software across Parity's National Health Service (‘NHS’), Central Government and Private Institutional clients.

Parity Group is the long-established, AIM-quoted recruitment and personnel business that delivers people skills and data-based solutions to support organisational growth and to drive positive change. Parity has extensive relationships with both blue-chip and government institutions, many of which are seeking means by which to better cope with and understand the extent of data, regulation and market opportunity within the communities they service.

As such, this agreement hands Rinocloud a vendor-approved, ready-made sales, marketing and distribution channel into a client base that is considered ideal for its mobile enterprise resource and data management software services. The two operational teams have already jointly identified a number of target customers across the Parity client portfolio, who would benefit from adoption of Rinocloud products and services. Consultations with these will be initiated early in 2020.

As such, it provides yet another important ‘string’ to Integumen’s prospective ‘revenue bow’. Moreover, it provides a clear demonstration of the value the Rinocloud acquisition is introducing to the Group in terms of opening significant new, high margin opportunities beyond its current core operations. It creates an opportunity to cross-sell intelligent data management while extracting value using analytics, with a focus on improving return on investment for Parity's 150+ institutional clients.

The software and systems services include full GDPR compliance with secure cloud data migration from existing legacy systems to a digital workplace through the military grade encryption ‘Drive4Growth’ AI platform powered by Rinodrive.

Potential combined benefits of this Framework Agreement are as follows:

• Recurring shared revenue streams for both Parity and Integumen in 2020• Value-added proposition in demand from Parity clients with c. 3 to 5-year annual contracts• Immediate access to 150 public and private institutional clients• Trusted approved vendor for Government and private sectors for over 45 years• 1,000+ data experts and 100+ enterprise sales and office professionals• Existing cross-over access to educational institutional research facilities• Access to multiple industry, public and private sector distribution routes to market• Well defined roadmap to next level business growth for both Parity and Integumen

Source: Integumen RNS https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/SKIN/14355180.html

Although Turner Pope recognises the potential opportunity the agreement presents in terms of longer-term, high margin technical support and contracts, it has not included any such expectations into its model forecasts at this time.

Should this agreement bear significant early fruit, it may provide opportunity for Turner Pope to upgrade near-term revenue and margin expectations for Integumen.

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STOER For Men (STOER Ireland Limited) STOER For Men skin products’ e-commerce division continues to be used as a control for client testing within Labskin laboratories and presently operates at around break-even. In January 2019, the Company initiated analysis of CBD oils in order to identify test protocols for a Labskin CBD test service for skincare products that contain the active cannabinoid.

Recognising the growing consumer interest in CBD products and with regulatory authorities increasingly demanding scientific proof of performance claims for product containing different concentrations of the ingredient, STOER offers an ideal control range capable of demonstrating ‘proof of concept’. During Q1’2019, Labskin tests had shown an increase in procollagen, which is known to improve the youthfulness of skin appearance and reduce inflammatory conditions, including blushing and swelling of the skin due to bacterial infection. This service has now been rolled-out and the Company has already won two CBD test contracts with new clients.

Wound pHase (LifeScienceHub Limited – 100%-owned subsidiary) The incidence of chronic wounds is growing, with approximately 1–2% of the USA population now said to be sustaining chronic wounds during their lifetime. This had led to approximately 6.5 million incidences with an annual cost of approximately US$25 billion6; in Europe, wound management costs approximately €6,650–€10,000 per patient and consumes 2–4% of total European healthcare budgets according to Integumen. Patients with diabetes are also at high risk of wound infections. Approximately 387 million people have diabetes, a number that is forecast to increase by 205 million by 203510.

WoundpHase already has a strong IP portfolio centered on innovative chronic wound dressing that notifies the patient or care giver as to the stage of healing without the need to remove the dressing. Lifesciencehub’s lead technology is a pH diagnostic tool, WoundpHase, which has applications in the staging of chronic non-healing wounds, such as diabetic foot ulcers and venous stasis ulcers. Wound pHase is a polymer film in disc form which is applied to a wound and surrounding skin in the same way as a traditional hydrogel dressing. Responding to the acidity/alkalinity of the wound, the disc changes colour within five minutes of application. The colorimetric response of the disc to the wound indicates the acidity/alkalinity of the wound bed; given that the pH of a chronic wound determines the ability of the wound to heal, Wound pHase allows caregivers to monitor the changing state of a wound, and therefore vary the appropriate treatment regime.

The Group also considers that the addition of CBD, with its known anti-inflammatory and pain relief properties, could contribute further to a faster recovery. In July 2019, the Group announced a collaboration with Cellulac plc, supported by the University of Limerick, Department of Chemical Sciences and the Research Centre for Resource Efficiency (tcbb RESOURCE), who are sponsored by the Irish Government, to develop a range of CBD infused chronic wound care and burn dressings.

Hemp-derived CBD The human body makes its own version of CBD compounds (called endocannabinoids) and has two receptors, namely CB1 and CB, which operate like neurotransmitters, switching on and off nerves. In turn, they create or nullify electric pulses that generate human life, consciousness and movement. Tetrahydrocannabinoil (‘THC’), the psychoactive substance has strong affinity to CB1, whereas CBD does not typically interact with this receptor but can trigger a response to the body’s endocannabinoids. Researchers, including Dr Joseph Cheer7, a neurobiologist at the University of Maryland who specialises in cannabinoids, suggest that CBD switches off electrical pulses associated with pain by locally adjusting calcium levels available to the body’s nervous system.

6https://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/SKIN/14165785.html 7https://www.medschool.umaryland.edu/profiles/Cheer-Joseph/ 10https://hansard.parliament.uk/Lords/2015-07-02/debates/15070243000901/HealthDiabetes

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Labskin has already successfully tested anti-microbial and anti-inflammatory effects on skincare through CBD-infused STOER For Men cosmetics products and is currently testing similar products for female hygiene at the Company’s Labskin test facility in York.

With a growing demand for CBD-infused products due to their anti-inflammatory and pain relief properties, Integumen considers its expertise in this area of skin wound repair and burns treatment, supported by Labskin’s testing capabilities and commercial experience, its unique CBD-infused pain-relieving treatment could be received well by consumers in this prospective multi-billion dollar global market. On 2 August 2019, the Company confirmed an agreement between AIM-quoted Highlands Natural Resources plc (now named Zoetic International plc (ZOE.L) with (9.35%-owned) Cellulac to supply hemp-derived CBD for medical grade conversion. These products are expected to be classified as medical devices and as such will be subject to the EU Medical Device Directives and US FDA regulations.

In addition, the company is developing its Labskin Temporary Tattoo (LTT), which uses a temporary tattoo ink that changes colour depending on what is happening to the skin and can even be used as a UV sunscreen that indicates when it has stopped being effective.

Management have previously sold wound dressings in 43 countries whilst they were working at Alltracel in 2003. Using similar methods for contract manufacturing of dressings along with comprehensive sales, marketing and distribution channel partners, this offers the potential to build the profile of the LTT and Wound pHase products. These will continue to be developed and may prospectively be sold through existing revenue sharing market channels, or the Board may consider the sale of these unique products to private label brands.

Micro Biomaterials

Integumen also undertakes design and fabrication of smart materials for studying, directing and mimicking biology.

Integumen plc – Micro Biomaterials Product Offering

Source: Integumen website

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Valuation

Given the expectation that Integumen will fulfil the growth strategy that has been outlined in this report, TPI has extrapolated its estimated free cash flow projection beyond those contained in its detailed forecasts (see below) out to 2028E. Having estimated annual revenue growth of 20% for the period ended-December 2023E, the rate has prudently been annually tapered over the following six periods down to 3% in 2029E, whereafter a terminal growth rate (‘TGR’) of 2.0% has been assumed in order to generate an indicative discounted cash flow (‘DCF’) valuation for the business. By this time, Integumen’s annual revenues are expected to have reached around £18 million with a gross margin leveling at a little over 70% for a business that has become dominated by its laboratory tech and data/AI services.

This projection is based on organic expansion only and takes no account of the numerous sales initiatives indicated in the body of this report (including potential new revenue streams from outside the Group’s core competence for Rinocloud sales or other related opportunities that may accrue once the Group’s buy-and-build acquisition strategy becomes effective). Modest additional scale benefits have been factored into the cost assumptions along with a rising corporation tax obligation. Together these translate into the free cash flow generation estimates as depicted below:

Key assumptions of DCF assessment

Given that Integumen’s business model and market opportunity have now become reasonably established, TPI has applied a prudent 10% discount rate to its DCF calculations to 2028E beyond, which it has assumed a prudent long-term growth rate of 2.0%. Such caution identifies appreciable risk that its business plan might not secure anticipated market traction over the coming years should major sector players move rapidly to emulate the Group’s business plan, potentially even loss-leading to capture customers with a broader ambition of securing longer-term data analysis opportunities.

Recognising however that Integumen’s business opportunity comes with heightening visibility of contracted orders/enquiries and that it is already providing specialist services in its relatively nascent but high-growth market, it is not considered appropriate to apply a further commercial risk factor to the gross DCF calculation.

This provides a DCF fair value for the company of £31 million. This valuation does account for the Group’s improved (post raise) balances sheet and assumes its operations become significantly cash generative from 2022E onward, beyond which it should have sufficient cash resource to fulfil the Board’s wider ambitions through its proposed ‘buy & build’ acquisition programme.

Integumen plc – DCF Summary Table

Year to December (£’000) 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E Free cash flow 1123 -30 50 1310 1850 2800 3220 3542 3719 3831 Discounted cash flow 1021 -25 38 895 1149 1582 1651 1655 1576 1479 Discount Rate= 10% TGR=2.0% Cumulative DCF 11,021 PV of residual value 18,858 Starting cash (debt) 1,109 Value of equity £30,987

Future forecasts are not a reliable indication of future performance. Source: TPI estimates

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Peer Group valuation summary

Given the hybrid nature of its offering, the peers group selected for Integumen comprises both UK-quoted healthcare diagnostics and data-tech/AI companies. Forward estimates for each have been compiled to provide a range of multiples across market capitalisation/sales, EV/EBITDA and P/E, from which an average has been calculated. These have then been applied to TPI’s 2022E forecasts for Integumen before discounting back the current period.

Integumen plc – Peer Group Summary Table

Source: TPI estimates,(2nd Jan 2020), Bloomberg

Source: TPI estimates

Having weighted the DCF and the Peer Group assessments equally, TPI

Peer Group Multiples

Company Ticker Market Cap

(£m) Mk

Cap/SALES EV/EDBITDA P/E x

EKF Diagnostics Holdings EKF 155.5 3.6 11.5 24.5

SDI Group SDI 75.3 3.6 13.5 21.5

Kainos Group KNOS 901.7 5.9 36.1 43.0

The Panoply Holdings TPX 39.4 4.8 12.2 23.5

Sanne Group SNN 992.0 6.6 20.9 28.7

Diaceutics DXRX 71.0 6.8 35.1 -

Average Peer Group Multiple 5.2 21.6 28.6

Peer Group Valuation £’m Integumen

FY’22E Results Multiplied plus net cash Discount factor (10%/yr) to

present value Revenue 8.00 5.2 - 34.4

EBITDA (post-exceptionals) 2.16 21.6 2.5 49.2

PAT 1.31 28.6 - 31.0

Average 38.2

arrives at a final target valuation for Integumen plc of £34.6 million, equivalent to 3.23p/share

Please note that this valuation is the result of financial modelling and there is no guarantee that such a valuation will ever

be realised, therefore please do not base investment decisions on this valuation alone.

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9th Janu ary 2020

Integumen plc - Projected Income Statement (2018A – 2024E)

Income Statement (Year end Dec) £’000

2018A 2019E 2020E 2021E 2022E 2023E 2024E

Revenue 274 1,000 4,000 6,000 8,000 10,000 12,000

Cost of sales -126 -300 -1,200 -1,650 -2,240 -2,800 -3,100

Gross profit (loss) 148 700 2,800 4,350 5,760 7,200 8,900

Admin -1,369 -1,820 -2,200 -3,300 -3,600 -4,200 -4,800

Exceptional items -244 -540 -100 -100 -100 -100 -100

Operating profit (loss) -2,082 -1,840 250 450 1,310 1,950 2,900

Finance income 0 10 0 0 0 0 0

Finance (expense) -38 -15 -30 -100 0 0 0

Profit (loss) before tax -2,120 -1,845 220 350 1,310 1,950 2,900

Taxation rebate (payment) 55 100 100 0 0 -100 -300

Loss from discontinued operations

-637 0 0 0 0 0 0

Profit (loss) after tax -2,702 -1,745 320 350 1,310 1,850 2,600

Foreign exchange arising -12 0 0 0 0 0 0

Total comprehensive income (loss)

-2,714 -1,745 320 350 1,210 1,850 2,600

Basic EPS (p) -1.04 -0.27 0.03 0.03 0.10 0.15 0.22

Average no of shares 258,730,165 641,939,796 1,072,416,903 1,200,000,000 1,200,000,000 1,200,000,000 1,200,000,000

Past performance and future forecasts are not reliable indicators of future performance.

Source: TPI estimates

67%68%69%70%71%72%73%74%75%

2019E 2020E 2021E 2022E 2023E 2024E

Integumen Gross Margin (%) Forecasts (2019E - 2024E)

0%

5%

10%

15%

20%

25%

30%

2020E 2021E 2022E 2023E 2024E

Integumen Operating Margin (%) Forecasts (2020E - 2024E)

Key: A = Actual, audited results, E = Estimated by TPI Source: TPI estimates

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0

2,000

4,000

6,000

8,000

2019E 2020E 2021E 2022E 2023E 2024E

Integumen plc - Period-end Cash Forecasts (£'000) 2019E - 2024E

Integumen plc - Projected Cash Flow Statement (2018A – 2024E)

Source: TPI estimates

Cash flow (Year end Dec) £'000 2018A 2019E 2020E 2021E 2022E 2023E 2024E

Profit after tax -2,065 -1,745 320 350 1,210 1,850 2,600

Depreciation 617 80 150 300 500 600 700

Amortisation 100 100 200 250 350 400

Change in inventories 39 40 100 200 200 200 200

Change in trade receivables -86 -100 -200 -300 -300 -300 -300

Change in creditors 602 200 200 200 250 300 350

Taxation -55 -100 -100 0 0 100 300

Cash generated from operations -957 -2,100 700 1,150 2,310 3,250 4,400

Taxation 45 100 100 0 0 -100 -300

Interest paid -38 -15 -30 -100 -100 0 0

Net cash used in operations -950 -2,025 770 1,050 2,210 3,150 4,100

Purchase of PPE -1 -688 -700 -900 -900 -1,300 -1,300

Purchases of intangible assets -75 -350 -200 -300 -300 -300 -300

Net cash used in investing activities -743 -1,088 -900 -1,200 -1,200 -1,600 -1,600

Proceeds from issuance of shares 1,943 3,926 100 200 300 300 300

Net cash from financing activities 1,764 4,236 100 200 300 300 300

Net change in cash 71 1,123 -30 50 1,410 1,850 2,800

Cash at beginning of the year -85 -14 1,109 1,079 1,129 2,539 4,389

Cash at the end of the year -14 1,109 1,079 1,129 2,539 4,389 7,189

Key: A = Actual, audited results, E = Estimated by TPI Source: TPI estimates

Past performance and future forecasts are not a reliable indicator of future performance.

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Integumen plc - Projected Balance Sheet (2018A – 2024E) Key: A = Actual, audited results, E = Estimated by TPI

Balance sheet (Year end Dec) 2018A 2019E 2020E 2021E 2022E 2023E 2024E

Property, plant and equipment 32 645 936 1,290 1702 2034 2409

Intangible assets 718 2,460 1,250 1,300 1350 1400 1450

Other investments 708 780 780 780 780 780 780

Total non-current assets 1,458 4,315 3,590 4,230 4,748 5,570 6,245

Inventories 135 130 230 430 630 830 1,030

Trade receivables 185 484 684 784 984 1,084 1,284

Cash and cash equivalents 26 1,095 1,079 1,129 2,539 4,389 7,189

Total current assets 346 1,709 1,993 2,343 4,153 6,303 9,503

Total assets 1,804 6,384 5,943 6,933 9,161 12,133 16,008

Trade payables 1,979 900 1,350 1,800 2500 3000 3500

Deferred tax liabilities 10 100 200 200 200 200 200

Interest bearing borrowings 185 200 200 200 200 200 200

Total current liabilities 2,174 1,200 1,750 2,200 2,900 3,400 3,900

Deferred tax liabilities 80 650 200 200 200 200 200

Loans 334 250 250 250 250 250 250

Total non-current liabilities 414 900 450 450 450 450 450

Total liabilities 2,588 2,100 2,200 2,650 3,350 3,850 4,350

Net assets -784 3,494 2,759 3,063 4,635 6,667 9,792

Past performance and future forecasts are not a reliable indicator of future performance.

Source: TPI estimates

Source: TPI estimates

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Conflicts

This is a non-independent marketing communication under the rules of the Financial Conduct Authority (“FCA”). The analyst who has prepared this report is aware that Turner Pope Investments (TPI) Limited (“TPI”) has a relationship with the company covered in this report. Accordingly, the report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing by TPI or its clients ahead of the dissemination of investment research.

TPI manages its conflicts in accordance with its conflict management policy. For example, TPI may provide services (including corporate finance advice) where the flow of information is restricted by a Chinese wall. Accordingly, information may be available to TPI that is not reflected in this document. TPI may have acted upon or used research recommendations before they have been published.

Risk Warnings

Retail clients (as defined by the rules of the FCA) must not rely on this document.

Any opinions expressed in this document are those of TPI’s research analyst. Any forecast or valuation given in this document is the theoretical result of a study of a range of possible outcomes and is not a forecast of a likely outcome or share price.

The value of securities, particularly those of smaller companies, can fall as well as rise and may be subject to large and sudden swings. In addition, the level of marketability of smaller company securities may result in significant trading spreads and sometimes may lead to difficulties in opening and/or closing positions. Past performance is not necessarily a guide to future performance and forecasts are not a reliable indicator of future results.

AIM is a market designed primarily for emerging or smaller companies and the rules of this market are less demanding than those of the Official List of the UK Listing Authority; consequently, AIM investments may not be suitable for some investors. Liquidity may be lower and hence some investments may be harder to realise.

Specific disclaimers

TPI acts as sole broker to Integumen plc (“Integumen”) which is listed on the AIM Market of the London Stock Exchange (“AIM”). TPI’s private and institutional clients may hold, subscribe for or buy or sell Integumen’s securities.

Opinions and estimates in this document are entirely those of TPI as part of its internal research activity. TPI has no authority whatsoever to make any representation or warranty on behalf of Integumen.

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